What to Do When Your Bank is in Trouble?

What to Do When Your Bank is in Trouble

People assume that their savings and deposits are safe in a reputed bank and hope for a secure future. However, a series of bank failures like Punjab and Maharashtra Cooperative Bank Ltd., Yes Bank, etc. , has shaken the faith of people in the banking system.

Banks can fail due to a multitude of factors including mismanagement, economic downturns, fraud, corruption, etc.  While we plan our finances and retirement, the possibility of banks failing has to be kept in mind.  Let us go over some strategies to minimize losses if and when our bank fails.

What to Do When Your Bank is in Trouble?

Check Your Insurance Coverage: Only deposit your funds in banks that are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). With this, even if your bank is in trouble or shuts down, you will get the insurance amount for up to ₹5 Lakhs.

Multiple Bank Accounts: To avoid having loss of savings, it is advisable to have savings accounts in different banks and deposit the funds in all these accounts instead of accumulating them in one account. This would allow us to fall back on some savings even if one of the banks faces failure. However, the decision of opening up a bank account should not be dictated by the fact of whether the bank is private or public.

Smart Banking: Spreading the money in different bank accounts helps in avoiding a crisis. In doing so, this would maximize the utilization of the insurance cover provided by the RBI. Furthermore, claiming this insurance will be more beneficial if the ownership is diversified.

For e.g.: if you have a fixed deposit of Rs. 14 Lakh in your name and another one of Rs. 5 Lakh in the same bank jointly with your spouse (as the first holder), both of you will be separately eligible for the insurance cover.

Spread the Electronic Clearing System (ECS): ECS is an electronic clearing system that your bank provides when one needs to electronically transfer funds from one bank account to another. You can spread the ECS procedure by having a primary and secondary bank account linked with it. The ECS mandates can run from the primary source while the investments are linked to a separate secondary bank account. This would help in avoiding risk when your bank is in trouble.

Consider Liquid Savings: For short-term investments and savings, liquid funds such as Certificate of Deposits, Commercial Papers, T-Bills, and Term deposits are a viable option to look out for. They provide a high degree of liquidity and safety to their investors.  The maturity period of such liquid funds generally spans from 3 to 6 months. They are generally low-risk investments and unlike bank deposits, their value doesn’t fluctuate. Hence, liquid funds are an excellent option to save your hard-earned money.

Remember, You Can Still Access Your Money: In case of a bank failure, the Reserve Bank of India intervenes and take the necessary step to continue its service. In such a situation, you will be permitted to use your funds under the guidelines of RBI.

Government Provisions to Tackle Bank Failure

Checklist of Major Banks: State Bank of India, ICICI, and HDFC Bank are major banks in India and considered safe. You can transfer your savings to these banks if you feel your current bank is not safe.

These tips can be extremely useful when your bank is in trouble. However, bank failures can be difficult to predict, so it’s wise to keep your funds safe. To know more about what happens when a bank fails or in trouble, read this article: Bank Failure: What Happens When a Bank Fails.

Have you dealt with a bank that was in trouble? If yes, share your experience in the comments below.

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